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Here’s How Much You Really Need To Save For Early Retirement

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Lazy mornings. Sandy beaches. The joyful noise of grandchildren playing.

The concept of retirement conjures different images for different people. And it can be really hard to get there. But one thing’s for sure: We all look forward to the day when we can quit work for good ― the sooner, the better.

For some, though, early retirement is more than a fantasy. It’s a goal they’re working toward aggressively. But how realistic is it? Here’s how much the typical person needs to save in order to retire early.

Getting FIREd up about early retirement

The financial independence/retire early movement (FIRE) is what many consider to be the holy grail of early retirement achievement.

Peter Adeney, better known by his online alter-ego, Mr. Money Mustache, is one of the many faces of today’s FIRE movement. He, along with dozens of other FIRE bloggers, detail what it’s like to whittle your expenses down to the bare minimum, save 70 percent of your earnings, retire in your 30s and live off of investment income. One look at the financial independence subreddit, and it’s clear that hundreds of thousands more are attracted to the idea of ditching their 9-to-5s before traditional retirement age.

Leave it to Suze Orman to rain on that parade. Late last year, the financial adviser turned self-help guru pulled no punches when describing her thoughts on the FIRE movement in an interview on the Afford Anything podcast.

“I hate it,” she told host Paula Pant. “I hate it. I hate it. I hate it.”

In fact, Orman described early retirement as one of the biggest mistakes a person can make. “You need at least $5 million, or $6 million. … Really, you might need $10 million.” Less than that, she said, and you’d run out of money too soon.

Not surprisingly, her comments prompted shock and outrage from the FIRE community. After all, this was coming from someone who did retire ― to a private island in the Bahamas, no less ― thanks to an estimated $30 million net worth amassed largely by hawking her financial advice and products. Oof.

Certainly, if everyone realized they could simply reject our consumption-crazed culture and invest the majority of their income so they never had to work again, there’d be no reason to buy books, DVDs and online courses from people like Orman.

But achieving early retirement isn’t quite so simple. And Orman’s $5 million figure might not be that far off.

How much do you need to retire early?

When it comes to determining how much you need to save to retire early, there’s no simple answer.

From a purely mathematical perspective, the rule of thumb within the FIRE community is to save up at least 25 times your annual expenses (not income!) before retiring early, explained Ryan S. Cole, a certified financial planner and private wealth adviser at Citrine Capital. For example, if your expenses amount to $60,000 per year, you would need $1.5 million in savings to retire ― the idea being that you could safely pull out 4 percent per year from the $1.5 million to cover your annual expenses.

Based on a famous 1998 paper by three professors at Trinity University, that 4 percent rule has become the go-to for calculating safe withdrawal rates in retirement. However, it relies on several assumptions, many of which can fall apart when you extend the typical 30-year retirement period on which it’s based to 40 or 50 years or more.

For one, it assumes an average annual return of 7 percent and an inflation rate of 3 percent (hence, the 4 percent you can safely withdraw without tapping into principal). However, “expecting the historical average market return of greater than 6 percent is very likely unrealistic,” said Bradley Nelson, president of Lyon Park Advisors. “Current yield of the S&P 500 is approximately 2 percent, and current economic growth is approximately 2 percent. Why would you expect an index fund that includes the largest portion of U.S. economic activity to grow more than the sum of those two?”

Another potential issue is experiencing a market downturn in the first few years of early retirement. “A bear market can wreak havoc on early retirement,” Cole said. “This is because a market downturn can significantly reduce the amount of capital invested, which results in pulling out large percentages of the investments in the early years while the portfolio is down.” As a result, your portfolio doesn’t fully recover when markets rebound.

For these reasons, some experts recommend reducing the withdrawal rate to 2 percent to 3 percent, just to be safe. That would mean you need to save even more.

“Even if you can live on $20,000 per year in your 20s, it might not be as appealing in your 50s.”

– Justin Pritchard

“I don’t like to target a specific dollar amount for retirement (like the infamous $5 million),” said Justin Pritchard, a certified financial planner and founder of Approach Financial Inc. “Instead, I think it’s best for people to do an actual calculation based on what they want and need. Five million might be enough, or it might not — it depends on what you want to do after you quit working and how willing you are to accept ‘surprises’ down the road.”

The high cost of growing older

Speaking of surprises, they’re going to happen. And the older you get, the more likely ― and expensive ― they become. A 30-year-old retiree might not be thinking about the possibility of receiving a cancer diagnosis or becoming the caregiver of an elderly parent. But these curveballs can upend your retirement plan ― and if you’ve been out of the job market for 20 years or more, it can be impossible to make up for those lost earnings. That’s Orman’s main argument, anyway.

“I’m not necessarily saying I agree with Suze Orman, but I’d caution people against planning for extremely low-cost retirement,” Pritchard said. He noted the idea of cutting out excess and valuing freedom over possessions is admirable, but things change. “When I was younger, my various body parts didn’t hurt as much, and I was willing to do without comforts that I’m more fond of now … Even if you can live on $20,000 per year in your 20s, it might not be as appealing in your 50s.”

How to make early retirement a reality

You don’t have to live off a third of your income or quit your job at 35 to enjoy an early retirement. And even if you do, you probably won’t need $5 million.

“If you spend $150,000 or less per year, like most Americans, then you certainly don’t need $5 million to safely retire early,” Cole said. “If you have $5 million saved (and invested properly), and you spend less than $100,000 per year, then you are going to die with a whole ton of money left in the bank.”

Plus, Nelson points out that FIRE doesn’t mean giving up work ― it’s about creating the financial freedom to do the work that gives you purpose. Indeed, you’ll find that many FIRE devotees don’t rely on investment income alone. They also earn money through businesses or side hustles, such as blogging and consulting.

“This doesn’t mean just giving up a few lattes; it’s a commitment to whole-life optimization.”

– Bradley Nelson

Additionally, early retirees focus on eliminating unnecessary spending so they don’t have to live off much. “The more you lower your expenditures on stuff and increase your investment in financial freedom, the sooner you can become financially independent,” Nelson said. “The higher the ratio of your current income to your expenditures, the faster you can accumulate what you need to be independent of a paycheck.”

Clearly, this kind of lifestyle isn’t for everyone. It requires a lot of sacrifice during what many would consider their prime years.

“This doesn’t mean just giving up a few lattes; it’s a commitment to whole-life optimization,” Nelson said. But it doesn’t mean living like a hermit either. According to Nelson, early retirement is “about getting the best life possible with the money you have.”

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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